Rising tariff tensions between the US and China are escalating economic risks, including a potential recession. Amidst uncertainty surrounding interest rate cuts by the Federal Reserve (FED) in May, Minneapolis FED President Neel Kashkari sheds light on how tariffs influence the FED’s decision-making process. Kashkari emphasizes that the current inflationary pressures caused by tariffs make it less likely for the FED to cut rates in response to economic weakening.
He criticizes the Trump administration’s tariff policy as being much more extensive and impactful than anticipated, arguing that they will negatively affect investment, growth, and potentially drive inflation upward at least in the short term. Kashkari explains:
* ‘Obstacles to changing the policy rate have increased due to tariffs.
* ‘Even as the economy and labor market weaken, the bar is higher and there’s time to cut interest rates.
* ‘Any upward or downward reaction of monetary policy should not be ignored. Ignoring inflationary effects of tariffs is ‘too risky.’
Kashkari emphasizes that keeping long-term inflation expectations stable remains paramount. He predicts short-term impacts such as rising inflation, purchasing power decline, investment slowdown, and GDP contraction due to the tariffs. The President also cites that these tariffs are far more impactful and have a bigger economic shock compared to what was initially expected.
*Kashkari highlights how monetary policy is currently tightening on its own, reducing the immediate need for rate hikes.* While he remains cautious about potential future policy adjustments, Kashkari notes that if uncertainty is quickly cleared, his perspective may change. The most pressing priority remains maintaining long-term inflation expectations stability.
Market expectations reflect a high chance of the FED keeping interest rates steady in May (58.5%), while a rate cut of 25 basis points has only a slight chance (41.5%). This information is not investment advice.